B2B e-marketplaces in the West European soft drinks industry
- How manufacturers can create and capture value -
Gerben Muller De Klomp, June ‘02
B2B e-marketplaces in the West European soft drinks industry
- How manufacturers can create and capture value -
Gerben Muller De Klomp, June ‘02
Rijksuniversiteit Groningen
Faculty of Management and Organization
Supervisors: Prof.dr. D. Jacobs Dr. A. Boonstra
International Data Corporation European B2B and eMarketplaces
Supervisor: P. Bilderbeek
All rights reserved. No part of this essay may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, photocopying, recording or otherwise, without permission of the author.
Executive summary
This research is focused on how the West European soft drinks manufacturers can use B2B e- marketplaces in order to create and capture value. Although the primary focus is on the soft drinks manufacturers, this essay is interesting and relevant for companies in the food and beverages and consumer packaged goods industries as well.
The research
Despite the dot-com malaise the predictions are that B2B e-marketplaces are on the verge of rapid growth. Preliminary research detected that it is interesting to reveal the value of trading direct products through e-marketplaces in the West European soft drinks industry, which is divided into the sectors: bottled water, carbonates, fruit/vegetable juice, functional drinks, concentrates and ready-to-drink coffee and tea. From these starting points the fundamentals of the research are defined.
Research objective
Define how soft drinks manufacturers can use B2B e-marketplaces in order to create and capture value.
Research question
How can soft drinks manufacturers use B2B e-marketplaces to create and capture value?
Sub-questions
In order to answer the research question it is subdivided into six sub-questions:
1. What are e-marketplaces?
2. What is the global situation of the soft drinks industry?
3. What are the current practices of e-marketplaces in the soft drinks industry?
4. What are the opportunities and threats of e-marketplaces for soft drinks manufacturers?
5. Which e-marketplace scenarios can create value for soft drinks manufacturers?
6. What are the key design features of e-marketplaces?
To obtain the hypothetical answers on the research question the research process was divided into the phases describe, analyze and design. A theoretical framework was composed in order to understand e-marketplaces and reveal the key issues that needed to be surveyed. Based on interviews with the soft drinks manufacturers, e-marketplaces companies and software providers of e-marketplaces, the soft drinks industry and how the manufacturers use e- marketplaces was described. Subsequently, the analysis considered the theoretical description and the results of the empirical survey to discuss the opportunities and threats and potential scenarios of e-marketplaces. Finally, a framework with the key design features was constructed that support the soft drinks manufacturer to assess the value of e-marketplaces for its company.
Theoretical background
A marketplace matches buyers and sellers and facilitates their trade. The electronic aspect does not change that role, but can speed up the processes, give access to buyers and sellers more easily and enable to manage transactions more efficiently. The products that are exchanged are direct or indirect. With regard to the matching process, these products can be coordinated through markets or networks. The market is more based on competition and zero- sum value, while the network relation is much more collaborative creating win-win value for the buyer and seller. Indirect and non-strategic products are likely to be coordinated by markets and the strategic direct products through networks.
4 E-marketplaces should be discussed in their historical perspective. This implies that the current stage of Information Technology (IT) of a company should be considered and especially the integration of the various systems and the current use of electronic data interchange (EDI).
Based on the factors governance or control, exchange structure and the private/public aspect, three main types of e-marketplaces are defined:
Buyer-controlled: an e-marketplace set up by or for one or several buyers with the aim of shifting power and value in the marketplace to the buyer's side.
Seller-controlled: an e-marketplace set up by or for one or several sellers to seek many buyers with the aim to create or retain value and market power.
Neutral-controlled: an e-marketplace set up by a third party to match many buyers to many sellers to let all parties benefit. It aims to manage transactions more efficiently.
A neutral-controlled e-marketplace typically favours the buyer and seller, while the buyer- and seller-controlled e-marketplaces favour, respectively, only the buyer or the seller. The value that an e-marketplace can create for companies depends highly on whether international standards (like XML) are established and liquidity is gained (i.e. the e-marketplaces has attracted sufficient buyers and sellers to obtain enough trading transaction, scale, to become viable). When integrating the internal organization with e-marketplaces, companies can capture the real value.
Soft drinks industry and e-marketplaces
The soft drinks manufacturers are relatively fragmented over the whole of Western Europe, but quite concentrated on national markets. There are a few global manufacturers that are relatively dominant. They not only produce soft drinks but also other food and beverages products.
However, the role of smaller manufacturers should not be underestimated. It is important to distinguish global and local branded products and private products owned by the larger retailers. These retailers have the most dominant position in the soft drinks industry. Smaller retailers and food services companies (i.e. institutions, restaurants and hotels), who are more fragmented, play also a significant role on local markets. The manufacturers' suppliers of direct products are relatively concentrated and focus on European and international markets.
From the manufacturer's perspective e-marketplaces can be used with its:
Suppliers of direct products Large retailers
Small customers (small retailers, food services companies, wholesalers and distributors) The current e-marketplaces are typically focused on the consumer packaged goods (CPG) industry set up by consortia of large companies. Soft drinks manufacturers prefer to go into the public e-marketplaces with other CPG manufacturers. Important issues are to set standards, create a common platform that sets the rules to work with the e-marketplace and to gain liquidity to ensure that there are enough buyers and sellers to make the e-marketplace viable. Upstream CPG manufacturers set up CPGmarket (and Transora in the US). Downstream they recently developed e-marketplaces like BgoBiz and Horeca-net to streamline the ordering process with their small customers. Large retailers developed WorldWide Retail Exchange (WWRE) and GlobalNetXchange (GNX). However, the survey showed that the soft drinks manufacturers make little use of these e-marketplaces because they continue to make use of established EDI connections, this until e-marketplaces have proven to be reliable. However, when a major retailer sets up its private e-marketplace (like Wal-Mart), they have little choice than to comply if that would be the only way to trade with them. The activities on the e-marketplace will be primarily executed in private environments. These activities will shift from sourcing and procurement to more collaborative processes that create value for buyers and sellers.
Conclusions
The greatest value of e-marketplaces for the soft drinks manufacturer is the profound awareness that its company has to tailor its internal organization to become ready to trade through e-marketplaces. The way the manufacturer succeeds in aligning the internal organization determines whether it can capture more value that its competitors.
Soft drinks manufacturers continue to use the established EDI connections and will not replace these by e-marketplaces in the near future. When e-marketplaces have proven to be reliable it will be gradually replaced by EDI.
To make e-marketplaces viable soft drinks manufacturers have to collaborate with other CPG manufacturers. This is especially important when developing e-marketplaces with their small customers in order to create one point of sale.
When dividing the value into zero-sum and win-win, the former creates value that is primarily focused on the short-term while the latter targets the long-term value. Soft drinks manufacturers can capture short-term value by bargaining lower prices of non-strategic products. Win-win value can be captured upstream with the suppliers of strategic products and downstream with their small customers by increasing the efficiency. The extent to which the soft drinks manufacturer can capture the value depends highly on its own strengths and weaknesses:
market power, market focus, product portfolio and IT evolution.
6
Preface
This project is the final part of my Masters of Management and Organization course at the University of Groningen (RuG). This end project is carried out at International Data Corporation (IDC) Benelux for the program 'European B2B and eMarketplaces'. The project started at the beginning of December 2001 and was ended in June 2002.
The essay is focused on how the West European soft drinks manufacturers can use B2B e- marketplaces in order to create and capture value. Although the primary focus on the soft drinks manufacturers, this essay is interesting and relevant for manufacturers and other companies in the food and beverages and consumer packaged goods industry as well.
This essay could not have been completed without the assistance of various people, who I would like to thank. I want to express my appreciation to my first supervisor at the RuG, Dany Jacobs, for his inspiring and constructive comments, suggestions and discussions. I want to thank Albert Boonstra for his remarks from his role as second supervisor at the RuG.
Furthermore, I want to thank my supervisor at IDC, Pim Bilberbeek, for his contributions and for providing the prerequisites to construct this essay. In addition, I wish to thank my colleagues at IDC Benelux and in particular Rogier Mol. I am also very grateful to Gert Muller and Menno Muller for reviewing and discussing the essay and to Jurian Muller for his assistance. I thank the respondents who consented to the interviews and provided valuable insight by sharing their ideas. Finally, I want to show my appreciation to my parents for their infinite support and encouragement throughout all the years and to Erika for showing her patience and moral support during this effort.
Gerben Muller
De Klomp, The Netherlands June 2002
Content
Executive summary... 3
Preface... 6
1 Introduction ... 10
2 The research... 11
2.1 Research relevance ...11
2.2 Problem definition ...11
2.3 Conceptual model ...13
2.4 Research methodology ...13
3 Traditional marketplaces ... 15
3.1 Definition of marketplaces ...15
3.2 Market structure...16
3.3 Transaction costs...17
3.4 Business processes ...18
3.4.1 Market transactions ... 19
3.4.2 Commerce and business ... 19
3.5 Supply chain ...20
3.6 Types of products ...21
3.7 Summary ...23
4 Electronic marketplaces ... 24
4.1 Historical perspective: the evolution of information technology...24
4.2 Electronic data interchange ...25
4.3 Definition of e-marketplace...27
4.4 Characteristics of e-marketplaces ...28
4.4.1 Exchange structures ... 28
4.4.2 Vertical and horizontal ... 30
4.4.3 Consortia... 30
4.4.4 Competition issues ... 31
4.4.5 Conclusion... 31
4.5 The value of e-marketplaces ...32
4.5.1 Predictions about the growth of e-marketplaces ... 32
4.5.2 Sources of value for e-marketplaces ... 33
4.5.3 Assessing the value of e-marketplaces ... 34
4.5.4 Conclusion... 35
4.6 Summary ...36
5 The West European soft drinks industry... 37
5.1 Global overview ...37
5.2 Supply chain of the soft drinks industry in Western Europe ...39
5.2.1 Upstream: suppliers of direct products ... 40
5.2.2 Soft drinks manufacturers ... 40
5.2.3 Downstream: retail and food services... 40
5.3 Summary ...41
8
6 Current use of e-marketplaces by soft drinks manufacturers... 42
6.1 IT evolution ...42
6.1.1 Integrating internal processes ... 42
6.1.2 Current EDI connections... 43
6.2 E-marketplaces...43
6.2.1 Suppliers - manufacturers... 45
6.2.2 Manufacturers - large retailers ... 46
6.2.3 Manufacturers - small customers ... 47
6.3 The future of e-marketplaces...48
6.4 Summary ...49
7 Opportunities and threats for soft drinks manufacturers... 50
7.1 General opportunities and threats ...50
7.2 Suppliers - manufacturers ...52
7.3 Manufacturers - large retailers...53
7.4 Manufacturers - small customers...54
7.5 Summary ...55
8 Scenarios: e-marketplaces for soft drinks manufacturers ... 56
8.1 Suppliers direct products - manufacturers ...56
8.1.1 Scenario 1: One supplier to one manufacturer ... 56
8.1.2 Scenario 2: Many suppliers to one manufacturer... 56
8.1.3 Scenario 3: One supplier to many manufacturers ... 57
8.1.4 Scenario 4: Many suppliers to many manufacturers ... 57
8.1.5 Conclusion: scenarios suppliers - manufacturers... 57
8.2 Manufacturers - large retailers...58
8.2.1 Scenario 1: One manufacturer to one large retailer ... 58
8.2.2 Scenario 2: Many manufacturers to one large retailer... 58
8.2.3 Scenario 3: One manufacturer to many large retailers... 58
8.2.4 Scenario 4: Many manufacturers to many large retailers ... 58
8.2.5 Conclusion: scenarios manufacturers- large retailers ... 59
8.3 Manufacturers - small customers...59
8.3.1 Scenario 1: One manufacturer to one small customer ... 59
8.3.2 Scenario 2: Many manufacturers to one small customer... 59
8.3.3 Scenario 3: One manufacturer to many small customers... 60
8.3.4 Scenario 4: Many manufacturers to many small customers ... 60
8.3.5 Conclusion: manufacturers - small customers ... 60
8.4 Summary ...61
9 Key design features ... 62
10 Conclusions and recommendations... 64
10.1 Conclusions ...64
10.2 Recommendations ...65
References ... 66
Appendix ...Error! Bookmark not defined.
1 Preliminary research ...Error! Bookmark not defined.
2 Market structures ...Error! Bookmark not defined.
3 Blurring organizational boundaries...Error! Bookmark not defined.
4 ECR and CPFR ...Error! Bookmark not defined.
5 Definitions e-commerce, e-business and e-marketplace ...Error! Bookmark not defined.
6 Questionnaire and interviews ...Error! Bookmark not defined.
7 Statistical data of soft drinks industry for Western EuropeError! Bookmark not defined.
List of figures
Figure 1. Conceptual model... 13
Figure 2. Overview of the research process... 14
Figure 3. Market structures by number of buyers and sellers (Van Weele, 19973) ... 16
Figure 4. Product attributes affect forms of organization (based on Malone et al., 1987) ... 18
Figure 5. Phase model of market transactions (Schmid and Lindemann, 1998)... 19
Figure 6. Value system (Porter, 1985) ... 21
Figure 7. Purchasing portfolio (Kraljik, 1983) ... 22
Figure 8. Evolution of information technology... 24
Figure 9. Network effects (Jacobs, 2001)... 25
Figure 10. EDI connections between buyers and sellers ... 26
Figure 11. E-marketplace ... 27
Figure 12. Exchange structures ... 29
Figure 13. Supply chain soft drinks industry... 39
Figure 14. Position of e-marketplaces in soft drinks industry ... 44
Figure 15. Example of how companies use e-marketplaces... 45
Figure 16. Screen views of GNX and WWRE... 46
Figure 17. Practices of e-marketplaces in the soft drinks industry ... 49
Figure 18. Opportunities and threats of e-marketplaces for soft drinks manufacturers ... 55
Figure 19. Assessing scenarios by exchange structures ... 56
Figure 20. Scenarios: suppliers - manufacturers ... 57
Figure 21. Scenarios: manufacturers - large retailers ... 59
Figure 22. Scenarios: manufacturers - small customers ... 60
Figure 23. Overview scenarios e-marketplace for soft drinks manufacturers ... 61
Figure 24. Design framework... 62
Figure 25. Traditional business (Johnson, 1999)...Error! Bookmark not defined. Figure 26. Virtual business (Johnson, 1999) ...Error! Bookmark not defined. Figure 27. The ECR vision (Applegate et al. 1999) ...Error! Bookmark not defined.
List of tables
Table 1. Overview participating manufacturers ... 14Table 2. Relative costs for markets and network (based on Malone et al., 1987)... 17
Table 3. Buyer-seller model (Mougayar, 1998) ... 20
Table 4. Comparative estimates of B2B e-commerce worldwide ... 32
Table 5. IDC's forecast of B2B e-commerce, Western Europe, 2000-2006 (Arnbjerg, 2002).... 32
Table 6. Sources of value for e-marketplaces (Based on Andrew et al., 2000) ... 33
Table 7. Sales of soft drinks worldwide in 1999 (Euromonitor, 2001a) ... 37
Table 8. Top five-concentration rates of manufacturers and retailers... 38
Table 9. Top five-concentration rates of manufacturers compared ... 39
Table 10. Overview practices of soft drinks manufacturers with e-marketplaces... 44
Table 11. General opportunities and threats of e-marketplaces... 50
Table 12. Opportunities and threats of e-marketplaces with suppliers ... 52
Table 13. Opportunities and threats of e-marketplaces with large retailers ... 53
Table 14. Opportunities and threats of e-marketplaces with small customers ... 54 Table 15. Sales of soft drinks by sector in 1999 (Euromonitor, 2001b)Error! Bookmark not
defined.
Table 16. Sales of soft drinks for Western Europe in 1999 (Euromonitor, 2001b) ...Error!
Bookmark not defined.
Table 17. Sales retail versus food service (Euromonitor, 2001b) .Error! Bookmark not defined.
Table 18. C5 of manufacturers and retailers for Western Europe Error! Bookmark not defined.
10 Table 19. Market share retailers per country (Dobson Consulting, 1999)Error! Bookmark not
defined.
Table 20. Market share manufacturers per country (based on Euromonitor, 2001b) ...Error!
Bookmark not defined.
Table 21. Soft drinks manufacturers per country (Euromonitor, 2001b)Error! Bookmark not defined.
1 INTRODUCTION
The end of the twentieth century has been dominated by the evolution of the Internet. In the early stages the Internet was focused on business-to-consumers markets (B2C). Online auctions and bookstores sprung up like mushrooms and venture capitalists invested without considering the viability of the business plans. Finally, the tide has moved to a realistic view on the value of the Internet.
Meanwhile the attention of the Internet shifted from the consumer markets to industrial customers, the business-to-business (B2B) markets. This move is very logical since every item bought by a consumer represents previous transactions between (online) stores, wholesalers, distributors, manufacturers and suppliers of raw materials. The combined value of these transactions many times exceeds the value of the last transaction in the value chain. Internet technology, therefore, offers enormous possibilities for managing trade in B2B markets through using electronic marketplaces (e-marketplaces).
The opportunity of managing the trade between buyers and seller through e-marketplaces seems enormous: increase efficiency, reduce process costs, reduce transaction costs, increase information availability (real-time) and speed up business processes. Even after the dot-com hype, many companies still believe that they can capture these values. Large manufacturers in the automotive and chemical industry are ahead in the development of this 'new' concept and set up the e-marketplaces Covisint and Chemdex. Compared to these industries the consumer packaged goods (CPG) segment lags behind but is making progress. The initiatives Transora and CPGmarket show enormous potential. However, there are many uncertainties about the future of e-marketplaces.
Due to the diverse characteristics of the various industries in the consumer packaged goods industry, research should focus on a specific sub-segment in order to increase the reliability of the results. Preliminary research suggests that the soft drinks industry is interesting to survey.
The central question of this essay is how West European soft drinks manufacturers can use B2B e-marketplaces in order to create and capture value. Within this relatively narrow focus the potential value of e-marketplaces will be surveyed in a broader context and encompass the buy- side and sell-side of the soft drinks manufacturers.
The essay is structured according to the following chapters:
Chapter two presents the starting points of this essay and elaborates the problem definition and methodology that are used to answer the research question.
Chapter three introduces the discussion about electronic marketplaces by considering the 'traditional' marketplace and its related topics.
Chapter four discusses the key issues of e-marketplaces.
Chapter five presents a description of the soft drinks industry in Western Europe.
Chapter six moves on with presenting the results of the survey by describing the current use of e-marketplaces by the soft drinks manufacturers.
Chapter seven elaborates the opportunities and threats of e-marketplaces for the soft drinks manufacturers.
Chapter eight continues the analysis by assessing the various scenarios of e-marketplaces for soft drinks manufacturers.
Chapter nine presents a framework with key design features of e-marketplaces that enables a soft drinks manufacturer to assess the opportunities and threats of e-marketplaces in relation to its strengths and weaknesses.
Chapter ten finishes this essay with conclusions and recommendations.
12 2 THE RESEARCH
This chapter describes the fundamentals of the research by elaborating the starting points of this research. The first paragraph explains the relevance of this research. Paragraph 2.2 provides the problem definition. Subsequently, the conceptual model is considered in paragraph 2.3 with the aim to structure the research topics that are surveyed. Finally, the last paragraph elaborates the research methodology to give insight in how the answers on the research question are obtained.
2.1 RESEARCH RELEVANCE
The prediction is that the value of commerce flowing through business-to-business e- marketplaces will grow rapidly the following years. IDC wants to conduct research on this topic for its program 'European B2B and eMarketplaces'. Due to the diverse characteristics of various industries, the aim of preliminary research was to detect an interesting industry to focus on. The starting point was prompted by the idea to look at the food and beverages industry. The preliminary research revealed that the soft drinks industry is an interesting industry to focus the research on (see appendix 1 for the elaboration).
2.2 PROBLEM DEFINITION
Research objective
Define how soft drinks manufacturers can use B2B e-marketplaces in order to create and capture value.
Research question
How can soft drinks manufacturers use B2B e-marketplaces to create and capture value?
Sub-questions
In order to answer the research question it is subdivided into six sub-questions, which can be categorized under the headings ‘describe’, ‘analyze’ and ‘design’.
Describe
1. What are e-marketplaces?
1.1. What are the main differences between electronic and traditional marketplaces?
1.2. Which types of e-marketplaces can be distinguished?
2. What is the global situation of the soft drinks industry?
2.1. Who are the main soft drinks manufacturers?
2.2. How is the supply chain of the soft drinks industry composed?
3. What are the current practices of e-marketplaces in the soft drinks industry?
3.1. What are the objectives and features of the e-marketplaces?
3.2. What are the characteristics of the e-marketplaces?
3.3. What are the main differences between different e-marketplaces?
Analyze
4. What are the opportunities and threats of e-marketplaces for soft drinks manufacturers?
5. Which e-marketplace scenarios can create value for soft drinks manufacturers?
Design
6. What are the key design features of e-marketplaces?
Scope and limitations
This paragraph elaborates the scope and limitations of this research. The limitations define the restrictions subject to the research. The scope describes the focus of the research.
Limitations
The output of the research consists of an essay and IDC report, both written in English, conform the demands of respectively the faculty Management and Organization of the RuG and IDC.
The IDC report is part of the 'European B2B and eMarketplaces' program and is thus restricted to these topics.
The deadline for the essay and IDC report was 31 May 2002.
Scope
The focus was on business-to-business e-marketplaces and encompasses the buy-side and sell-side of the soft drinks manufacturers.
Concerning the geographic market, the research was focused on Western Europe1.
The research was focused on large and medium sized manufacturing organizations in the soft drinks industry.
The research emphasizes the trade of industry-specific products, which are related to the manufacturing process of the soft drinks manufacturers.
Terms explained
This paragraph explains important terms used in the problem definition:
Business-to-business (B2B): the trade and exchange of products and services between two or more business partners, rather than consumers. Buyers and sellers in this trade have, in general, much understanding about the technical aspects of the products and are less influenced by emotional aspects.
Scenarios: based on the analysis of the opportunities and threats of e-marketplaces for soft drinks manufacturers the possibilities of B2B e-marketplaces are described, which result in different scenarios2.
Soft drinks manufacturers: the manufacturing of soft drinks3 is divided into the sectors:
Bottled water;
Carbonates;
Fruit/vegetable juice;
Functional drinks;
Concentrates and
Ready-to-drink (RTD) coffee and tea.
Value: one uses value in certain expressions to say whether something is worth the money that it costs. Reflecting this definition on the value of e-marketplaces, it should be worth to invest effort and money. This implies that e-marketplaces should gain profit in the future.
This profit could be captured in the long-term or short-term.
1 The Western Europe region consists of Austria, Belgium/Luxembourg, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom
2 Note that the term scenario in this research does not imply a full scenario analysis with complex what-if analysis (based on the scenario thinking).
3 According to the American SIC-code system (of 1987) the soft drinks industry encompasses the codes 2086 and partly 2037 and with regards to the European NACE-code system the soft drinks industry, as defined in this research, is covered by the codes 1532 and 1598.
14 2.3 CONCEPTUAL MODEL
The conceptual model elaborates a way of looking at reality. It helps to structure the research question. Therefore, the model covers only the most important aspects and relations to provide an overall picture (De Leeuw, 1996).
Figure 1. Conceptual model
The conceptual model (depicted in Figure 1) is concentrated around the topics e-marketplaces and manufacturers. Manufacturers purchase products from suppliers (the sellers) and sell these to their customers (the buyers). An important aspect of these e-marketplaces are the number of trading partners involved in the exchange (see dotted circles in Figure 1). In order to research the use of e-marketplaces the buy-side and sell-side of the soft drinks manufacturers are surveyed. Therefore, different possibilities are compared and assessed on their potential value.
Subsequently, the key design features of the e-marketplaces will be determined.
2.4 RESEARCH METHODOLOGY
The type of the research can be characterized by the results (the product) and the approach to produce the results (the process) (De Leeuw, 1996). Considering the product type, the aim of this research is to yield information that assists decision-making with regards to the research question. The results of this research are primarily relevant for the soft drinks manufacturers in Western Europe, but could be interesting and relevant for companies in the food and beverages or consumer packaged goods industry as well. This research typically obtains hypothetical answers. In terms of Baarde en De Goede (1995), this research is defined both descriptive and exploratory. Descriptive because it elaborates related topics within the specific research area and exploratory because the research is focused on finding causal relations or differences between the various topics and answers open questions.
To obtain the hypothetical answers on the research question the process of the research was divided into three phases as illustrated in Figure 2. In order identify the important aspects to focus the description on, a theoretical framework was composed. Hereafter, the first part of the description gives a global overview of the soft drinks industry and the second part presents the practices of the current use of e-marketplaces by soft drinks manufacturers. Subsequently, the opportunities and threats of the e-marketplaces for soft drinks manufacturers were analyzed.
This analysis was the input for examining the use of e-marketplaces to gain value for soft drinks manufacturers. Based on the results of this analysis different scenarios were given, after which the key design features of e-marketplaces were described.
E-marketplaces
Key design features of e-marketplaces
Exchange structures Exchange
structures
Valuable Scenarios
Seller(s) Manufac-
turers Buyer(s)
Figure 2. Overview of the research process
The six sub-questions (see paragraph 2.2) expound what information is needed to discuss the research question. The method of data collection explains how that information is found. There are various methods to collect data. For this research the methods desk research and field research can be distinguished. Desk research can be described as a study of literature. This method focuses on searching published information in books, journals, serials, annual reports and research studies. Different sources for this information are libraries, the World Wide Web, databases, trading-companies and other researchers. The second method is field research, distinguishing quantitative and qualitative methods. The qualitative research is best used for problems when the results will generate hypotheses (Gordon, 1988) and is, therefore, most appropriate for this research. There were two research groups where field data was collected:
1. Soft drinks manufacturers
2. E-marketplaces companies and software providers of e-marketplaces
The companies participating in this research are primary found by searching the Internet on websites of trading and research companies. The interviewees are primarily interviewed by telephone and a few times through a face-to-face discussion. These one-hour interviews were guided by a partly structured questionnaire that also contained background information with the aim to avoid confusion about the research focus and e-marketplaces. The most important questions of the questionnaire for the soft drinks manufacturers are assimilated throughout the theoretical framework with the aim to emphasize the relation between the theory and the survey. Table 1 depicts a few basic characteristics of the manufacturers who participated in this research. The second and third columns show on what geographic market the company focuses. The 'industry' presents whether the companies only manufacture soft drinks or also other food and beverages products. The last column indicates how many employees are working at the manufacturer. To guarantee anonymity, the companies' names are not used throughout the essay. Appendix 6, which contains a list of the interviewees and the results of the interviews, is confidential and has to be used accordingly.
Manufacturer Focus Scope Industry Employees
1 National The Netherlands Soft drinks 250 - 499
2 National The Netherlands Soft drinks 500 - 999
3 National Finland Soft drinks 1000 - 2499
4 National France Soft drinks 1000 - 2499
5 National Spain Food and beverages 1000 - 2499
6 Regional Austria, Eastern Europe Soft drinks 250 - 499 7 Regional Belgium, France, Germany Soft drinks 500 - 999 8 Worldwide Western Europe, Worldwide Food and beverages > 2500 9 Worldwide Western Europe, Worldwide Food and beverages > 2500 Table 1. Overview participating manufacturers
Soft drinks manufacturers
Current e-marketplaces
O/T* of the e-marketplaces
for soft drinks manufacturers
Key design features of e-marketplaces
Describe Analyze Design
Global overview
Scenarios Practices
Analysis of O/T*
* O/T stands for opportunities and threats
Valuable Scenarios
16 3 TRADITIONAL MARKETPLACES
The advent of the Internet has not changed the essence of gaining profit. The 'old' rules of competition remain basically the same. As Porter (2001) cites: 'In our quest to see how the Internet is different, we have failed to see how the Internet is the same.' To consider the basics and related topics of a marketplace this chapter elaborates the fundamentals before putting the
‘electronic’ aspect into the discussion. First the definition of a marketplace will be explained, from which the important aspects of marketplaces are described. Subsequently, these aspects are individually discussed in the paragraphs 3.2 till 3.6.
3.1 DEFINITION OF MARKETPLACES
A market is a place where goods are bought and sold. In business, a marketplace refers to the activity of buying and selling products or services. Schmid and Lindemann (1998) point out that a marketplace allows buyers and sellers to meet at a certain place and a certain time in order to communicate and to announce buying and selling intentions, which eventually match and may be settled. In addition, Van Weele (19973) notices that the place of the market could be tangible but is mostly intangible and abstract.
The central aspect in the definitions is that a marketplace facilitates exchanges between buyers and sellers. These exchanges consist of information, goods, services and payments (Bakos, 1998; Schmid and Lindemann, 1998). The marketplace serves as an intermediary between two or more trading parties. The intermediary functions of a marketplace can be divided into:
1. Matching buyers and sellers
2. Facilitating the exchange of goods and services
3. Providing an institutional infrastructure (such as legal and regulatory framework)
Market intermediaries provide the first two functions, while the government manages the third function. The price of the exchanges depends on the extent of competition, which is influenced by the power of the different trading parties: the market structure (see paragraph 3.2).
A market transaction corresponds to a finite number of interaction processes between market participants. The goal is to initiate, arrange and complete a contractual agreement for the exchange of goods and services in the most efficient manner (Schmid and Lindemann, 1998).
According to Nooteboom (1999) the transaction itself is an event that is part of the exchange process. Therefore, the total costs involved in establishing transactions include, for example, also search costs of the buyer and marketing costs of the supplier. Paragraph 3.3 describes these transaction costs in more detail. In addition, other processes are executed within a company. Paragraph 3.4 describes these processes and their differences.
On the industry level the company is embedded in a large stream of transformations executed by various organizations. Binding these together results in an overview of the industry's supply chain (see paragraph 3.5). Through the supply chain companies add value to various products.
To gain insight in the different types of products paragraph 3.6 discusses these.
In advance to the next chapter, it should be mentioned that adding the electronic aspect to marketplaces does not change its role as discussed above. The issues that are critical to traditional marketplaces have a similar essential role in electronic marketplaces. Therefore, the following paragraphs, which elaborate the characteristics of 'traditional' marketplaces, provide a framework to discuss the e-marketplaces in chapter 4.
3.2 MARKET STRUCTURE
Analyzing the market structure gains insight in the conditions in which companies operate. This is critical for defining competition among the industry and helps to explain and predict market outcomes. Shepherd (19974) elaborates the market structure by distinguishing three elements:
1. Market share: the main feature of each market position defined by the firm's share of the total sales revenue.
2. Concentration: the combined market shares of the leading organizations, commonly based on the top four or five firms.
3. Barriers to entry: at the edge of the market there may be barriers to entry, which impede potential competitors from entering.
These elements of market structure are combined when assessing the degree of competition in a market. Whatever the specific conditions of the market structure may be, the essence of competition is always the same: mutual exertion of pressure to perform well. In a competitive environment the organization tries to gain more market power than their competitor to be able to sell its products above the existing competitive level or to reduce its costs below the competitive level to increase its profit. Two variables (the number of players and the extent of product differentiation) define four generic market structures (Shepherd, 19974, Verhage, 1994):
Pure competition: many sellers of a standardized product.
Monopolistic competition: many sellers of a differentiated product.
Oligopoly: few sellers of a standardized or a differentiated product.
Monopoly: a single seller of a product for which there is no close substitute.
These four market structures each represent an abstract characterization of a real market (see appendix 2 for a more extensive elaboration of market structures).
The previous classification is described from the sellers’ perspective. On the other end there are a certain number of buyers. Depending on both the number of sellers and the number of buyers the relative power of the buyers or sellers can be inferior, equal or dominant in relation to the opponent (Van Weele, 19973). This structure is depicted in Figure 3. An organization has to make a profound analysis of its position in relation to the buyers and sellers to define its market power. However, the relative competitive power of the indirect competitors should also be considered (e.g. potential entrants and substitutes).
Figure 3. Market structures by number of buyers and sellers (Van Weele, 19973) Number of
Sellers (supply)
One
Many
Number of buyers (demand)
Supply Monopoly Limited supply
Monopoly Bilateral Oligopoly
Pure Competition Demand
Monopoly Limited demand
Monopoly
Supply Oligopoly Demand
Oligopoly Bilateral
Monopoly
Few
One Few Many
Demand stronger than supply Supply and demand are equal Supply is stronger than demand
18 3.3 TRANSACTION COSTS
Coase (1937) already found out that firms would tend to expand until the cost of organizing an extra transaction within the firm becomes equal to the costs of carrying out the same transaction by the means of an exchange on the open market. Williamson developed, on basis of these ideas, the theory for transaction cost economy (TCE) (Caspers et al., 1999). According to this theory, economies have two basic mechanisms for coordinating the flow of materials or service through adjacent steps in the value chain (Malone et al., 1987):
Markets: coordinate the flow through supply and demand forces and external transactions between different individuals and firms. The buyer of the goods compares its many possible sources and makes a choice based on the best conditions (i.e. price, quantity etc.). The relation between the buyer and seller tends to be highly based on price competition.
Hierarchies: coordinate the flow of materials by controlling and directing it at a higher level in the managerial hierarchy. The buyer governs the products (or services) by its own coordination, which does not involve a buyer-seller relation.
Besides the market and hierarchy Williamson (1991) describes in his later work a third form of governance, the network or hybrid form. This is an intermediate form between markets and hierarchies, but follows its own logic. Coordination among partners to a hybrid form results in long-term and short-term contracts that are generated almost automatically. Within this form a distinction is made between 'trilateral governance' and 'bilateral governance'. The former is used when transactions are not frequently generated. The latter is useful to coordinate specific and long-term contracts, which tend to be strategic partnerships that are characterized by reciprocity (Nooteboom, 19992). Considering the three forms and the role of a marketplace, the market and network typically involve the matching process of buyers and sellers to exchange products, while the hierarchy coordinates the exchange within its own organization4. The market tends to be based on competition, while the network relation is likely to be much more collaborative. In the discussion of e-marketplaces the market and network form are typically interesting because buyers and sellers are matched. E-marketplaces have the potential to increase the market transparency and increase the efficiency of the matching process.
Therefore, this essay focuses on these two forms.
The price of a product consists, in general, of production costs, coordination costs and a profit margin. Production costs include the physical or other processes necessary to create and distribute the products. Coordination costs include the transaction costs of all the information processing necessary to coordinate the work of people and machines that perform the processes. For example, coordination costs include determining the design, price, quantity and delivery schedule. In markets this involves selecting suppliers, negotiating contracts and paying bills (Malone et al., 1987). In networks this involves tailoring the planning and collaborative design.
Organizational form Production costs Coordination costs
Markets Low High
Network High Low
'Low' and 'high' refer to relative comparisons within columns, not to absolute values.
Table 2. Relative costs for markets and network (based on Malone et al., 1987)
With regards to a transaction one chooses the coordination mechanism that involves the lowest transaction costs. Table 2 compares the relative costs of production and coordination for markets and networks.
4 Jacobs (2000) remarks that it is becoming more incorrect to consider the organizational principles market and hierarchy as extremes, because market relations manage in more situations the relations between business units within an organization (creating markets within hierarchies). In addition, the intermediate form should also be considered.
Due to the assumption that through e-marketplaces products can be compared more rapidly they have the potential to increase market transparency. This results in reduced costs of coordination through markets (e.g. search costs reduction), making this mechanism more interesting. In this respect, Malone et al. (1987) discusses two other factors that need to be considered in determining the desirable coordination structures:
Asset specificity: something is asset specificity if it can not readily be used by other firms because of site specificity (e.g. water spring), physical asset specificity (e.g. specialized machine tools), human asset specificity (e.g. personal knowledge) or time specificity (e.g.
perishable goods that will spoil if they arrive to late).
Complexity of product description: this refers to the amount of information needed to specify the attributes of a product in enough detail to allow potential buyers to make a selection.
Figure 4. Product attributes affect forms of organization (based on Malone et al., 1987) Highly complex production descriptions require more information exchange, increasing the need for the coordination mechanism of networks over markets. Thus buyers of products with complex production descriptions are likely to work closer with a single supplier, while buyers of simple described products can more easily compare many alternative suppliers in a market.
Figure 4 shows that the network is used if both product and asset specificity are relatively high.
Conversely, if the factors are relatively low it is more likely to obtain the transaction by the market. Relating these aspects to the assumption that e-marketplaces increase the interest in coordination through the market mechanism, the complexity of the product description is an important issue (paragraph 3.6 this in more detail).
3.4 BUSINESS PROCESSES
The previous paragraph described the transaction costs with the central consideration of performing a transaction through the market or network. In order to establish these transactions a company executes different processes or activities5. The aim of this paragraph is to discuss these in more detail in order to understand and discuss the principles and potential value of e- marketplaces in the next chapter. Therefore, firstly the stages of the market transactions illustrate the interaction processes of buyers and sellers on a marketplace. Subsequently, the difference between business and commerce are discussed and related to the previous discussed mechanisms markets and hierarchies.
5 From the system approach a process consists of different adjacent and related activities (De Leeuw, 2000; In 't Veld, 19997). A process is thus a higher view than an activity. However, depending on the level of description a process could be considered as an activity. In this essay both terms will be used with the comment that both an activity and process transforms the input into an output with the aim to add value.
Market
Asset specificity
Complexity of production description
Low
LowHigh
High Network
20 3.4.1 MARKET TRANSACTIONS
The market transaction can be considered as a detailed description of matching buyers and sellers through the market and network mechanisms. Schmid and Lindemann (1998) group the involved processes into three phases (see Figure 5):
1. Information phase: suppliers and customers acquire a market overview by gathering information about the products (e.g. price and specifications) and potential market partners (e.g. liquidity and delivery date). This phase results in an offer.
2. Agreement phase: the conditions of the transactions are negotiated. The result is a legally binding contract representing the agreement between the market partners.
3. Settlement phase: the contract and agreements are fulfilled. Depending on the exchanged products, the settlement phase can have various sub-functions, like transport and storage.
Figure 5. Phase model of market transactions (Schmid and Lindemann, 1998)
Besides these phases a fourth phase could be added, namely the after-sales, including after- sales product support, customer service and evaluation of the transactions (Grieger, 2000).
3.4.2 COMMERCE AND BUSINESS
The expressions commerce and business are easily used as synonyms. Although these terms are related, a closer consideration of the definitions illuminates the difference. This is critical because the next chapter presents that adding the electronic aspect in the discussion increases the diffusion about various meanings of these terms. Moreover, the distinction is important because commerce processes are typically associated with transactions coordinated through markets, while business activities are linked to more collaborative processes between buyers and seller that are coordinated through networks. Commerce can be defined as 'the activities and procedures involved in buying and selling of products and services' and business refers to 'a particular area of work or activity in which the aim is to take a profit'. Thus, commerce solely focuses on the processes of buying and selling while business encompasses all the processes that are executed in an organization. Eventually, all the activities in an organization are directly or indirectly focused on the settlement of transactions that gain profit. From the seller's point of view the commerce process is focused on marketing activities to reach their customers and sell their products. In retrospect, buyers search for sellers to purchase their products or services.
Mougayar (1998) elaborates in a buyer-seller model the different processes distinguished by the phases: pre sales, sales and post sales (see Table 3). The market transaction described by Schmid and Lindemann can be related to the 'buyer-seller model' (see third column of Table 3).
They expound the buying and selling activities on different aggregation levels. For this essay it is important to consider the transaction phases with acknowledgement of the detailed activities.
Information phase
Agreement phase
Settlement phase
End of transaction Contract Offers
Supplier Customer
Sellers Buyers Market Transactions Pre
sale
Distribution Promotion Display Pricing policy
Search/inquire for product Discover product
Compare products Negotiate terms
Information and agreement phase
Sale Receive order Authorize payment Schedule order
Build or retrieve from inventory
Place order
Receive acknowledgement Initiate payment
Receive product
Settlement phase
Post sale
Ship product Receive payment Support process Market research
Request support Give feedback
After-sales phase (Grieger, 2000)
Table 3. Buyer-seller model (Mougayar, 1998)
The above elaboration emphasizes interaction phases between buyers and seller who are continually searching for new customers and suppliers in the market. However, once a relation between a buyer and seller is established they could decide to intensify collaboration by, for example, sharing and tailoring the production planning and forecasts. In general, these activities intend to create a win-win situation. Buying and selling processes will shift to the more collaborative processes. In terms of TCE (described in paragraph 3.3), the governance shifts from market transactions to a more network partnership.
To analyze all the activities that are executed in a company Porter (1985) developed the value chain distinguishing primary activities and supporting activities. Primary activities6 are involved with the physical creation of a product, its sale and distribution to buyers and its service after the sale. The supporting activities provide the support necessary for the primary activities to take place.
This paragraph explained that business processes cover all the processes in a company including the commerce processes. However, as the previous elaboration illuminates, a clear distinction is hard to draw. In this essay I, therefore, prefer to use the term business if the contrast is not clear.
3.5 SUPPLY CHAIN
A company's value chain in a particular industry is embedded in a larger stream of activities, which Porter (1985) named the value system. This includes suppliers who provide inputs to the company's value chain that, subsequently, passes through the value chains of the distribution channels to become purchased inputs of the value chain of their buyers, who use the products to perform activities of their own (see Figure 6). Another term that is used in association with the value system is the supply chain or industry's supply chain7.
6 According to De Leeuw's (2000), a company exists to realize the primary process. This implies an emphasis on an internally focused point of view. Although he describes that the primary process has to have a relation with the mission and stakeholders, Porter (1985) emphasizes more the external (and customer's) focus as a reason for executing the primary processes. In my opinion, both views need to be considered emphasizing the value for customers.
7 The supply chain could be regarded as a synonym for the value chain (embedding the activities or processes of one company). On the industry level the individual value chains or supply chains are embedded in the value system. As a synonym for the value system it would be correct to use the supply system or industry's supply chain. However, the managem ent literature is not clear on this point and uses these terms indifferently. The context, in which the words are used, often clears the intended meanings of the terms. When the context is not clear, I prefer use the term (industry's) supply chain.
22 Figure 6. Value system (Porter, 1985)
Linkages not only connect activities inside a company but also create interdependencies between a company and its suppliers and channels. There are certain gradations in these interdependencies. De Leeuw (2000) describes the three interdependencies distinguished by Thompson:
Pooled: different processes (e.g. A and B) that are not directly related and can be performed parallel. The coordination is based on standardization.
Sequential: different processes that are sequentially related. First process A has to be completed before process B can be executed. The coordination is based on planning.
Reciprocal: different processes that are directly related to each other and have to be tailored during execution. The coordination is based on mutual adjustment.
The coordination increases from pooled to reciprocal. Reflecting the interdependencies on the flexibility of a relation between two companies they become less flexible if the collaboration increases. The company has to be aware that intensifying the collaboration and the mutual adjustment creates risk for both companies involved (Jacobs, 19992). The basis of the relation between flexibility and coordination is that the flexibility will not increases by enhancing coordination, but by reducing the need for coordination (Jägers and Jansen, 1999). Note that in terms on TCE (see paragraph 3.3), these interdependencies gradate the governance by networks.
3.6 TYPES OF PRODUCTS
Not all products are equally important or crucial to the company. Some products are, therefore, obtained via markets and others through networks. Besides this 'traditional' consideration, exchanging products via e-marketplaces involves the issue that these products are traded through the Internet, which is a relatively impersonal and anonymous medium. Not all products are appropriate to trade via the Internet. This paragraph discusses the types of products to obtain a better understanding in their various characteristics to define which types of products tend to be suitable to exchange via the e-marketplaces.
To distinguish different types, a first classification is made between direct and indirect8. Direct products go directly into a product or manufacturing process (e.g. raw materials and components). These products can be considered as industry-specific. Indirect products are not part of the finished product and are often called maintenance, repair and operating (MRO) goods (e.g. office equipment and PC's). Indirect products tend not to be industry specific. This essay focuses primary on the direct products.
Companies buy various types of products that are not equally important and strategic to the organization. In this perspective, Kraljic (1983) developed a portfolio for purchasing different types of products based on two factors:
1. Financial impact: the strategic importance of the purchasing in terms of the value added by product line, the percentages of raw materials in total costs and its impact on profitability.
2. Supply risk: the complexity of the supply market gauged by supply scarcity, entry barriers, logistics cost or complexity and monopoly or oligopoly conditions.
8 Kaplan and Sawhney (2000) name these types of products respectively manufacturing inputs and operating inputs.
Company value chain
Channel value chains
Buyer value chains Supplier
value chains
By assessing the company's situation in terms of these two variables a company can determine the type of supply strategy it need to exploit its purchasing power related to the importance of the suppliers and reduce its risk to an acceptable minimum. Using these two criteria, the company can sort out its purchased items into the four categories depicted in Figure 7.
Figure 7. Purchasing portfolio (Kraljik, 1983)
Each of the four categories requires a distinctive approach:
Strategic products: these products are purchased from one or very few suppliers. They represent a high proportion of the cost price of the final product and are very crucial for the company. Much interaction and communication involve buying these products.
Leverage products: there are different suppliers who can deliver these products that represent a relatively high amount of the cost price.
Bottleneck products: in terms of money, these items represent a relatively low value for the company. However, the supply involves high risk, which makes the supply vulnerable.
Routine products: these products do not deliver much value for the company and the supply risk is very low.
Shifts in supply or demand can alter a material's strategic category. Therefore, a company has to update the purchasing portfolio regularly. In addition, for the selling side of the company it is important to assess the kind of products they produce in the perception of their customers in order to create an effective selling approach.
Relating the previous elaboration to the discussion about coordination of products through markets or networks, I assume that the products with a high financial impact and/or high supply risk (strategic, leverage and bottleneck products) seem to be coordinated through networks rather than markets. However, the aspects asset specificity and the complexity of product description should also be considered (as discussed in paragraph 3.3). Although a clear distinction is hard to draw, it is evident that these issues play a role in the discussion of e- marketplaces. In my opinion, in general, indirect products tend to be governed by markets and are, therefore, more appropriated to trade through e-marketplaces. The explanation for this is that these products are not strategic to the buyers (relatively low financial impact and supply risk). However, it is likely that this depends highly on the characteristics and definition of an e- marketplace. E-marketplaces could, thus, also play a significant role in coordinating direct products optimizing network relations.
Routine products
Strategic products
Supply risk
Financial impact
Low
LowHigh
High Bottleneck
products Leverage
products
24 3.7 SUMMARY
This chapter described and explained the 'traditional' marketplace and introduced the issues that need to be considered when discussing the e-marketplaces in the next chapter. It seemed that the number of buyers and sellers and their related market power is a crucial issue to survey. To discuss this aspect in the interviews with the soft drinks manufacturers the guiding questionnaire includes the question:
What is the relative market power of the different players (like suppliers, manufacturers, distributors and retailers) in the soft drinks industry and why?
This chapter presented three forms of coordinating products: markets, networks and hierarchies. Markets and networks involve matching buyers and seller, while hierarchies coordinate the products through its own organization. Considering the function of a marketplace to match buyers and sellers, this essay focuses on the market and network forms. In my opinion it is likely that the value of the market mechanism is, in general, primary based on the 'zero- sum' principle. Because these products tend to be less strategic to the buyer, there is no need for a strong relationship. Thus, the buyer tries to bargain the best conditions for the lowest price, shifting the value of the trade to the buyer. The network mechanism tends to be based on the 'win-win' principle. In this situation the relation between buyers and sellers is collaborative creating value for both players. To define which mechanism coordinates which products the first distinction between direct and indirect is important. In addition, the issues complexity of product description, asset specificity, financial impact and supply risk have to be considered.
4 ELECTRONIC MARKETPLACES
The previous chapter introduced the fundamentals of a marketplace. This chapter puts the 'electronic' aspect into the discussion and elaborates the key issues of electronic marketplaces, in short e-marketplaces. Paragraph 4.1 firstly elaborates the evolution of information technology (IT). Hereafter, paragraph 4.2 considers the ancestor of e-marketplaces: electronic data interchange (EDI). Subsequently, the definition of e-marketplaces and its characteristics are described in respectively the paragraphs 4.3 and 4.4. The final paragraph 4.5 discusses the potential value of e-marketplaces.
4.1 HISTORICAL PERSPECTIVE: THE EVOLUTION OF INFORMATION TECHNOLOGY
The evolution of information technology can be described in different overlapping stages, each of which evolved out of constraints presented by the previous generation (Porter, 2001). This evolution is depicted in Figure 8 (the triangle represents a single organization). In the earliest stage IT automated only one function, typically supporting the financial department. The development evolved by supporting more organizational functions (shown as 'n'). The third stage linked these individually automated functions in one single database (supported by enterprise resource planning (ERP) system). Strongly related to this stage the different business processes are aligned establishing cross-activity integration, such as linking sales activities with order processing (like concepts as business process reengineering (BPR)). The fifth stage started primarily with EDI but is now being accelerated by the Internet, enabling integration of the industry's value chain by interorganizational systems (IOS). In the sixth stage organizational boundaries blur due to the increasing interaction via Internet and the use of e- marketplaces. In this stage complex product models will be exchanged among parties and collaborative product design is integrated9 (see appendix 3 for a visualization of movement towards blurring organizational boundaries).
Figure 8. Evolution of information technology
Depending on the stage, IT enables that data and information flows seamlessly across the various business functions and processes within the organization and across to the organizational boundaries connecting companies (Davenport, 2000).
9 The elaboration of the stages and the evolution of inform ation technology are based on Porter (2001), McLoughlin (1999), Applegate et al. (1999) and the lectures given for the course Management of Information and Knowledge Technology in 2001 by A. Boonstra (University of Groningen, faculty Management of Organization).
Evolution of information technology
Automating 1 function
Automating n functions
Linking n functions
Integrating process
Interoganizational systems (IOS)
Blurring boudaries
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
Stage 6
26 4.2 ELECTRONIC DATA INTERCHANGE
Electronic data interchange (EDI) can be regarded as the ancestor of e-marketplaces. This twenty years old technology is still widely used among large companies. Discussing the 'roots' of e-marketplaces is important because it illuminates the first principles that linked buyers and sellers electronically. This paragraph discusses EDI and compares the benefits and disadvantages with e-marketplaces.
An important issue in the discussion around EDI is that different 'standards' (dialects) are used in various industries. Because of these different standards, exchanging information is much harder than it would be if there was only one standard. This aspect is related to 'tippy markets' and the 'network effects'. A 'tippy market' implies that it is more interesting for the demand side to have or use only one standard. In other words, there is a low need for a variety of different products. In addition, the 'tippy market' is interesting for suppliers because they can appropriate high scale effects and profits if they succeed in supplying the standard. For example, companies and consumers most commonly use the office applications of Microsoft (like Word and Excel). The interoperability of exchanging documents in these formats increases if potential users choose to use the same application. Thus, the value increases significantly. Jacobs (2001) describes that according to Shapiro and Varian, a market tends to become 'tipping' if, firstly, the network character of the demand of the products is strong (the customers do not require variety) and, secondly, the scale advantages of the supply side are high. The rewards on the demand side will, in theory, be equally among those who adopted the standard. The difference is how the standard technology is used in business. Thus, the technology facilitates the business and can be regarded as a catalyst. In contrast, if a company succeeds to set up and supply the standard, it will be the 'winner takes all', just like a monopoly (Figure 9 illustrates the importance of standardization to establish the network effect).
Figure 9. Network effects (Jacobs, 2001)
The need for a faster, cheaper and more accurate solution to exchange information resulted into the development of EDI (EAN International, 1998). This technology can commonly be described as 'a computer-to-computer technology supplying one-to-one computer connectivity over a closed value-added network (VAN) using standardized messages' (FIPS, 1996; EAN International, 1998; Mol, 2001b). The data set exchanged is of a predefined format, authorized by the parties who use the EDI system, minimizing the human intervention once the system is implemented (appendix 4 discusses the business concepts ECR and CPFR based on the possibilities of EDI). The common standard of the EDI messages is particular important to create one language (standard) to take advantage of the network effect. Without this common language the situation would rapidly become unmanageable as the number of trading partners increases. This common language can be illustrated like Figure 11 (paragraph 4.3), where the quadrilateral indicates the EDI standard (instead of 'e-marketplace') to exchange messages between the multiple buyers and sellers.
Infancy Expansion Maturity Decline The importance
of standardizing Network effects?
(‘winner takes all’)
